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Forbes On Amazon: 3 Pros And 3 Cons About Splitting The Stock

Forbes contributor Peter Cohan has presented a short-term solution for Amazon: Split the company into Amazon Services and Amazon Products. Here's our take.

In response to Amazon’s  (AMZN) - Get Amazon.com, Inc. Report weak performance last year, Forbes’ Peter Cohan has suggested it's time to split the company into two parts:

  • Amazon Services, which would include Amazon Web Services (AWS), advertising businesses, third-party seller services, and Prime subscriptions
  • Amazon Products, which would include Amazon’s physical product businesses

Here's a list of pros and cons for this idea.

Figure 1: Amazon Web Services (AWS) logo.

Figure 1: Amazon Web Services (AWS) logo.

(Read more from the Amazon Maven: Bank of America: 3 Reasons Why Amazon's a Strong Buy)

Pros

1. It would bet on the company's winners: Cohan’s argument is centered on the fact that Amazon’s e-commerce growth is much slower than the lucrative AWS and advertising segments. “While this won’t solve Amazon’s fundamental growth problem, it would give investors a choice of whether to bet on Amazon’s asset-light businesses or its asset-intensive ones,” he wrote.

2. Portfolio concentration: From a portfolio management viewpoint, this could be positive. A split would allow shareholders to weigh how much of the e-commerce arm they wish to invest in, versus how many shares of its tech counterpart they want.

3. Anti-antitrust charges: The move could help fight some of the antitrust accusations Amazon has been facing in the U.S. and Europe. That's because the Seattle-based company would no longer be a conglomerate of such titanic proportions.

Cons

1. The end of the flywheel: In essence, a split would mean the end of AWS serving as a cash cow for its other businesses, especially the e-commerce segments. The e-commerce wing would lose its ability to safely make risky long-term investments (like the ones it made in 2021).

2. A loss of competitive edge: Because the company’s competitive advantages lie in the combination of its fast delivery service, Prime memberships, and advertising, breaking up Amazon could mean investors’ money would be going to:

  • A maybe more profitable AWS, an advertising enterprise that's far from being Google, and a streaming business that lags Netflix; or
  • An e-commerce money that's not as strong as it once was.

Other Ways to Split Amazon

Seeking Alpha author Bradley Guichard has argued Amazon’s top management could simply split its stock into more shares (instead of breaking up the company).

However, in theory, this wouldn't change Amazon’s equity value. Evidence has shown a stock split might actually drive up Amazon's trading price, as it did for Apple, Tesla, and Nvidia. Ultimately, that would raise the company's market capitalization.

Still, investors shouldn't lose sleep over this issue. CEO Andy Jassy hasn't indicated any intention of either splitting the stock or breaking up the company.

(Read more from the Amazon Maven: Amazon Stock: Should You Buy It in January?)

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)